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Time for a Global Carbon Emissions Tax

Mats Persson is Professor Emeritus at the Institute for International Economic Studies (IIES), Stockholm University.

By Mats Persson

The problem is staggering, even existential. Global emissions of greenhouse gases – especially carbon dioxide – are rapidly driving up global temperatures, transforming life as we know it. If those temperatures reach 2oC above pre-industrial levels, scientists warn, the results will be catastrophic. An international conference is called, under the auspices of the United Nations. Politicians declare that the world must curb CO2 emissions to avoid exceeding the 2oC threshold. And then nothing substantial happens.

The 2015 UN climate conference in Paris was supposed to be different. It produced a document, signed by 197 parties, containing general guidelines for climate policy and memorializing a global commitment finally to address the problem. As usual, however, emissions have continued to rise steadily, increasing the concentration of atmospheric CO2 at an alarming rate. Last year’s climate conference in Katowice, Poland – which focused on making the Paris commitments more specific and binding – did nothing to change this.

Agreeing to quantitative, universally applied emissions-reduction targets at a UN conference is easy. But countries automatically regard adherence to those targets as a sacrifice: in the effort to reduce emissions by x tons, we would lose y million jobs, and GDP will fall by $z billion. Because there are no actual sanctions or punishment for non-compliance, when push comes to shove, governments can simply change their minds.

Even if a government does try to uphold its commitments, say, by imposing new regulations on high-emitting industries, it may not obtain the desired results. Businesses, too, want to avoid making any sacrifices, so they will seek any way to avoid regulations, including bribing government officials to look the other way.

Questions of fairness can further weaken incentives to fulfill UN climate commitments. Why should a poor developing country make the same reduction, whether in absolute or proportional terms, as a rich Western country? After all, on their path to high-income status, Western economies emitted with abandon.

Poor countries not only face constraints on development that their rich counterparts never did; it is also much harder for them to cover the costs of creating a low-carbon economy. Compensation is discussed, but countries consistently fail to agree on who should receive how much support, and who should pay. So the debate is pushed to the next conference. Meanwhile, the volume of atmospheric CO2 keeps increasing.

The voluntary quantitative restrictions that underpin the UN climate agenda amount to a weak foundation for a solution to the crisis. A better approach would begin with a uniform tax on CO2 emissions worldwide – say, $100 per ton.

Virtually all economists agree that, from an economic perspective, such a tax would create a much firmer foundation for climate action, not least because it would generate immediate revenues for governments. A global tax would also be politically more feasible than national measures – such as the French fuel tax that triggered widespread protests against President Emmanuel Macron – because consumers would not bear the full cost.

To be sure, prices for consumers would still rise, with the precise amount depending on the price sensitivity of supply and demand. If the supply of oil were completely inelastic (that is, if the world had a fixed number of wells from which oil could be pumped at no cost), the market price would fall by exactly the amount of the tax. In such a scenario, the full cost of the tax would be borne by the owners of the oil wells.

But supply is not completely inelastic. If the market price is high, new oil deposits (with higher extraction costs) will be developed; if it is low, some existing production will be closed down. The extent to which oil companies adjust to shifting demand will thus shape the effect of a global CO2 tax on consumer prices.

Because supply is not completely elastic, either, producers and consumers would share the burden of the CO2 tax, meaning that both would have an incentive to reduce their fossil-fuel production and use – and thus their emissions. If the billions of dollars in new tax revenue, at least partly funded by oil producers, were channeled toward broadly beneficial or otherwise popular investments, voters might be more than accepting of a CO2 tax.

A CO2 tax would also go a long way toward resolving the corruption problem raised by quantitative emissions restrictions, because governments would have less incentive to accept bribes from companies, especially if officials are held accountable for meeting revenue targets. Even governments that are skeptical about climate change might find the added revenues sufficiently appealing to support the tax. In this sense, a CO2 tax is “incentive compatible”: all governments – corrupt or honest, dictatorial or democratic, climate skeptic or climate leader – have a motive to impose and enforce it (provided that all other countries do the same).

As for fairness, the issue would be resolved in an ad hoc way: all oil-consuming countries, rich or poor, would receive tax revenue that is partly covered by oil-producing countries, which include the richest (and, in some cases, most corrupt) economies in the world. This might not be the optimal way of redistributing wealth across countries, but it is a feasible one. And the inclusion of any element of redistribution could ease resistance to climate action among developing countries frustrated by the advantages enjoyed by their wealthier counterparts.

The next UN climate conference will take place in Santiago, Chile, in December. That gives the world eight months to prepare a new agenda focused on coordinating a worldwide CO2 tax. Oil-producing countries will vote against it, because it would be much harder to avoid implementing than current commitments. But if most of the international community stands behind the measure, a UN conference could, at long last, bring genuine progress toward reducing global emissions and curbing climate change.